R&D tax relief for smaller companiesThis is a useful relief
for small companies engaged in research and development. We have
provided below a few definitions to help readers decide if their
endeavours qualify for this relief:
• this relief is available to companies subject to Corporation
Tax (CT), so in the main, limited companies only.
• group structures need to be taken into account.• small and
medium sized enterprises (SMEs) can apply if:
◦ staff headcount is less than 500◦ either turnover is less than
€100m, or balance sheet total is less than €86m.
If your company qualifies, what counts as R&D?
To claim this relief, R&D is deemed to have taken place when
a project seeks to achieve an advance in overall knowledge or
capability in a field of science and technology. According to the
notes provided by HMRC:
R&D has a specific statutory definition for the purposes of
R&D tax relief which is not the same as the commercial,
engineering or accounting definitions.
To qualify, the company must be carrying out research and
development work in the field of science or technology. The relief
is not just for ‘white coat’ scientific research but also for
‘brown coat’ development work in design and engineering that
involves overcoming difficult technological problems.
This can include creating new processes, products or services,
making appreciable improvements to existing ones and even using
science and technology to duplicate existing processes, products
and services in a new way. But pure product development in itself
does not qualify.
Some examples of qualifying activities include software
development, engineering design, new construction techniques,
bio-energy, cleantech, agri-food and life and health sciences.
To summarise, matters to consider include:
• does your company have a project?• is the aim of the project
to seek an advance in a field of science or technology?• does the
advance extend overall knowledge or just your company’s own state
of knowledge or
capability?• were the projects started in the last 2 or 3
years?• does your project involve uncertainty that a competent
professional can’t readily resolve and
where solutions are not common knowledge?
What costs qualify for R&D relief?
Costs that may qualify include:
• direct and externally provided staff – your company can claim
for salaries, wages, Class 1 NIC and pension funding for staff
directly involved.
• externally provided staff – these are costs paid to an agency
for staff engaged in a project. Relief is usually given at 65% of
the payments made to the staff provider.
• subcontracted R&D – again, claims are generally restricted
to 65% of costs.
• consumables, software, trials, prototyping – costs applied
directly to the R&D activity can usually be claimed.
• independent research costs – only large companies can claim
for R&D relief on contributions they make towards funding
independent research.
Costs that cannot be included:
• capital expenditure, including the cost of land; although
other reliefs may be available.
• expenditure on the production and distribution of goods.
• payments for the use and creation of patents and
trademarks.
Finally, if you have received a grant towards a project that is
notifiable under State Aid you can’t get relief under the R&D
scheme. Your grant provider should be able to provide this
information.
How much tax relief will a qualifying project attract?
From 1 April 2015, the relief a company can claim is 230% of
their qualifying R&D costs. Large companies can claim the
Research and Development Expenditure Credit (RDEC). This was
increased from 11% to 12% of the qualifying R&D expenditure
from 1 January 2018. If your company is loss making, these tax
credits can be claimed subject to certain restrictions.
How do you claim the R&D relief?
The simple answer is you enter the total qualifying expenditure
on your company’s CT return – arriving at this figure is a more
complex matter.
HMRC have posted a brief outline of the issues you will need to
consider when making a claim:
• show that you looked for an advance in the field - Your
project must aim to create an advance in the overall field, not
just for your business. This means an advance can’t just be an
existing technology that has been used for the first time in your
sector. The process, product or service can still be an advance if
it’s been developed by another company but isn’t publicly known or
available.
• show there was uncertainty - You should be researching or
developing something that isn’t known to be scientifically or
technologically feasible when you make or discover it. This means
that your company or experts in the field can’t already know about
the advance or the way you achieved it.
• explain how you tried to overcome the uncertainty - You should
show that the R&D needed research, testing and analysis to
develop it. You need to be able to explain the work you did to
overcome the uncertainty. This can be a simple description of the
successes and failures you had during the project.
• show that a professional in the field couldn’t work this out -
You should explain why a professional couldn’t easily work out your
advance. You can do this by showing that other attempts to find a
solution had failed. You can also show that the people working on
your project are professionals in that field and get them to
explain the uncertainties involved.
In conclusion
The ability to more than double the tax relief for the
tax-allowable costs associated with your project is a compelling
reason to take this relief seriously. For companies who have yet to
generate profits from their research, the further feature of
R&D relief, to surrender your claim for a refundable tax
credit, will provide a much-needed cash flow fillip for your
project.
Making a claim for this relief is not a task for the faint
hearted. We can help. Before you start a project it is well worth
having a preliminary discussion to see if a project is likely to
qualify and then organising the paper-trail to facilitate a
successful claim.
If you feel that you have an existing project, or a future
project that may benefit from a claim,please call.
Summary action list
• Since November 2015, it has been possible to apply to HMRC for
advance assurance. This means that for the first three accounts
claim periods, HMRC will allow the claim without further
enquiries.
• A reminder that even if your company is loss making you can
surrender an R&D claim for a cash refund, a tax credit.• The
process of making a successful claim is not for the faint hearted.
Take advice at the planning stage of your project.
In preparing and maintaining this publication, every effort has
been made to ensure the content is up to date and accurate.
However, law and regulations change continually and unintentional
errors can occur and the information may be neither up to date nor
accurate. The editor makes no representation or warranty (including
liability towards third parties), express or implied, as to the
accuracy, reliability or completeness of the information published
in this publication.
R&D tax relief for smaller companiesIf your company
qualifies, what counts as R&D?What costs qualify for R&D
relief?How much tax relief will a qualifying project attract?How do
you claim the R&D relief?In conclusionSummary action list
